Megaupload shutdown: Detrimental to box office revenues?

The shutdown of popular file hosting platform Megaupload.com on January 19th of this year may have resulted in a negative impact on box office revenues, according to an academic study – Piracy and Movie Revenues: Evidence from Megaupload – carried out by the Munich School of Management and Copenhagen Business School.

The authors, Christian Peukert and Jörg Clausseny, note that early theoretical literature on piracy suggests decreasing revenues as a result of copying, more recent work takes indirect mechanisms such as bundling of consumer with heterogeneous willingness to pay, and (social) network effects into account. Such models suggest that firms may actually benefit from piracy.

“According to a recent survey by Smith and Telang (2012), also the results of the empirical literature are mixed, however the majority of papers find that privacy negatively impacts sales,” say the researchers.

They used weekly data from 1,344 movies in 49 countries spanning from 2007w31 to 2012w35. The data is obtained from Boxofficemojo.com, a commercial provider of industry statistics. Their sample begins with the launch of Megaupload’s video streaming service, which made it considerably more convenient to watch pirated movies online. The estimation strategy is based on a quasi difference-in-differences approach. Peukert and Clausseny compare box office revenues before and after the shutdown to a matched control group of movies unaffected by the shutdown.

Across a number of control group specifications, they found that the shutdown had a negative, yet in some cases insignificant effect on box office revenues. In addition, box office revenues of movies shown on the average number of screens and below were affected negatively, but they suggest the total effect is not statistically significant. For blockbusters (shown on more than 500 screens) the sign is positive (and significant, depending on the specification).

They describe the finding as “counterintuitive”, which may suggest support for the theoretical perspective of (social) network effects where file-sharing acts as a mechanism to spread information about a good from consumers with zero or low willingness to pay to users with high willingness to pay.

According to Peukert and Clausseny, the information-spreading effect of illegal downloads seems to be especially important for movies with smaller audiences. “‘Traditional’ theories that predict substitution may be more applicable to blockbusters,” they suggest.

“We aim to contribute to the emerging empirical literature on the effects of piracy. We believe that the setting we study offers a unique opportunity for causal identification. Our results have implications for theory and firm strategy in practice, but may also contribute to the recent global debate on copyright in the digital society,” they conclude.